As governments worldwide tighten their grip on the financial sector, the very essence of anonymous cryptos is currently frowned upon by many authorities.
These coins offer users the ability to transact, without revealing their identities, raising questions about the balance between financial privacy and regulatory compliance.
As a result, crypto exchanges are under pressure to implement more advanced Know Your Customer (KYC) and Anti-Money Laundering (AML) policies to satisfy legal requirements, or even go to extreme measures by delisting some established coins from their trading platforms.
The announced removal of Monero (XMR) from Binance could signal increased regulatory scrutiny on cryptocurrencies that prioritize anonymity. It also may lead to other exchanges following suit, due to concerns about compliance with law.
The move followed a so-called periodic project review to see whether the token still meets the high level of standard — including stability and safety of the network from attacks, responsiveness to the exchange’s periodic due diligence requests, and evidence of unethical and fraudulent conduct — or industry changes.
Commenting on the matter, Grayson Earle, a co-founder of Bail Bloc, an initiative that mines Monero for the Immigrant Bail Fund to bail people from jail, told CCN:
“Binance is a centralized exchange which has become an established political entity in blockchain transactions. It has its own vested interests (including but not limited to compliance with the state) and it has a significant impact on the valuation of cryptocurrencies which it does and does not include on its platform.
“It should come as no surprise that such an organization can and will, for any reason, make decisions about the assets it deems appropriate to list on its exchange platform.”
The changes in question apparently include the new Markets in Crypto-Assets regulation, or MiCA , a comprehensive regulatory framework for digital assets within the European Union.
“It is obviously in the interest of the state to be able to track the movements of individuals, including their purchases and financial assets in general. As an entity which seeks state approval, it is obviously obliged to comply with these interests,” Earle elaborated.
While the proposed measures aim to enhance security, they also raise concerns about privacy and the decentralized nature of cryptocurrencies. The regulation mandates that crypto asset service providers must keep detailed records of their customers’ transactions.
This level of scrutiny is intended to deter financial crimes, but it also means that users’ transaction data could potentially be accessed by authorities, which might be seen as an intrusion into individuals’ financial privacy.
It’s worth noticing that non-privacy coins like Bitcoin (BTC) and Ethereum (ETH) are public, so you can see the transactions, with a slew of blockchain analytics software enabling for tracing cryptocurrency flows on a large scale. Such tools can analyze transaction patterns and identify the involved parties, without needing KYC.
Anonymous cryptos like Monero make this a lot more challenging. Where lawmakers seek to prevent anonymity in financial dealings, privacy coins inherently facilitate it by masking transaction details.
Still, Finland’s National Bureau of Investigation (KRP) claimed, last month, that it had managed to track down XMR transactions that were part of a payment fraud case. Binance allegedly became the endpoint of these transfers.
While the specifics of the tracking methods remain undisclosed, this breakthrough demonstrates the evolving capabilities of law enforcement agencies to counteract the anonymity of certain cryptocurrencies traditionally seen as untraceable.
Money laundering and other criminal activity associated with the illicit use of cryptocurrencies never ceases to be a widely-discussed topic.
“If we are being intellectually honest, there are reasonable arguments to be made which favor this approach [regulatory scrutiny], including the desire to curb harmful behavior enabled by darknet markets. In practice, Monero is the de facto currency of the darknet, given its utility in providing anonymity in the purchase of, among other things, illicit substances,” admitted Earle and added:
“There is also an argument to be made that people have the right to privacy, and that many of these exchanges are not harmful and can include innocuous transactions for commodity goods.”
Notably, recent research by Chainalysis found that overall, illicit crypto transactions declined by nearly 40%, in 2023.
They fell to $24.2 billion from $39.6 billion, in 2022, with the leading cryptocurrency Bitcoin accounting for the vast majority of ransom payments. Overall, illicit activity in cryptocurrency remained a small share of total volume at less than 1%, according to the findings.
Privacy in financial dealings can indeed be controversial. There have been instances where unchecked government authorities have violated financial privacy.
Additionally, the increase in digital banking and integration of artificial intelligence continue to raise consumer data privacy concerns, as there is no all-encompassing law to address it. It makes the balance between security measures and individual rights a contentious issue.
Apart from obvious reasons like protecting personal information from unauthorized access and potential fraud, privacy in financial transactions allows individuals to support causes and organizations privately, without fear of backlash or alienation from those with differing views.
Anonymity also can shield whistleblowers and activists who may face severe consequences for their financial associations. This is particularly important for transactions that may be legal but are socially sensitive.
Regulatory pressure has previously contributed to the removal of privacy-focused cryptocurrencies from various exchanges.
Just at the end of December, crypto exchange OKX announced it would delist almost all privacy coins “in order to maintain a robust spot trading environment.” A year prior, another leading crypto exchange, Huobi, also delisted a number of anonymous cryptos.
In an effort to align with financial regulations, trading platforms occasionally opt to remove certain cryptocurrencies. This is seen as a move to mitigate potential legal risks and maintain operational integrity in a rapidly evolving regulatory landscape.
“Decentralization and privacy go hand in hand in the sense that identity verification essentially relies upon an authority which possesses a centralized database of individuals. Those concerned with the availability of an untraceable currency should not rely upon any centralized entity, as it is fundamentally at odds with the ethos of decentralization,” said Earle.